Episode 402: The Problem with Private Markets

23:40But with these private assets, it could be illiquidity followed by, oh, there's actually no value and the fund had to collapse. You may never get asset value from it. Maybe you will, but maybe you won't. That's a very good point.

23:57Ben Felix:I think I mentioned that later about just how when your fund gets locked up, you're forced to own assets that you know are distressed and you don't know what the outcome is going to be. You're going to continue paying private asset, private fund level fees. Anyway, the inflection point where these things started gaining a lot of popularity, was following the 2008 financial crisis, likely at least in part in response to the traumatic levels of volatility in publicly listed assets over that period, and also the need for investors to find ways to recover from the losses they sustained in that market decline.

24:28Ben Felix:If you're an institution in 08, all of a sudden your assets have tanked in value. Your liabilities, if you're a pension fund or an insurance company, liabilities haven't changed necessarily. You've got this big shortfall all of a sudden. And so a lot of institutions started looking at how can we not live through this crazy volatility again? And how can we increase our expected returns to make up our current shortfall? Private markets were sold as a less volatile place to invest with potentially higher returns, higher expected returns. In my opinion, that alone should be a major red flag, the promise of lower volatility and higher expected returns.

25:08Ben Felix:But people really want to believe that they are not subject to the economics of risk and expected return. People want to believe they can find a free lunch. Another interesting point here is that a big selling point, just on the topic of institutions, a big selling point always was and continues to be Yale's endowment. Yale kind of pioneered the strategy of going into illiquid private investments, and they did earn years of famously high returns investing in private markets with the legendary David Swenson at the helm. Other investors have always wanted to emulate that outcome. Now, there's been some recent research that's quite interesting, basically showing that while Yale did perform well, the idea that they earned 30 % annualized returns in private markets, which is a number that gets thrown around, was probably not what happened.

25:56Ben Felix:Those 30 % per year returns over a pretty long period of time were based on IRRs, which can be very, very misleading, particularly when early returns are high. When you look at Yale's returns, they're much lower. Anyway, it's just an interesting point. My view on private assets has always been that net of fees and properly benchmarked, there's nothing special in private assets. That can be contentious. We'll talk more about that. But I think that point only gets more true in the realm of retail investors who generally pay even higher fees. And adding onto that, the issues of adverse selection that we've already talked about.

26:37Ben Felix:Now, again, this can be contentious. Do private markets outperform public markets? That's an unsettled debate. And I do acknowledge there's a lot of room for nuance. There are some good private market funds, at least after the fact, maybe in some cases before the fact, there is some persistence in private markets where you can pick good managers who will then continue to outperform. There are also good public market funds, but I don't know if that means we should start embracing active management. On balance, when you look at the data in private markets, I'm just not convinced that the sales pitch matches the economic reality.

27:13Ben Felix:We'll look at each asset class real quick here. There is some pretty interesting stuff happening in each one. Private equity invests in private companies, attempts to increase their value and then exit the investment if they can, which has been a struggle recently, as we mentioned earlier. tries to exit the investment at a profit. Private equity has multiple underlying strategies with the two largest buy assets being buyouts and venture capital. Buyouts is the largest segment by assets and that's where firms acquire a stake in a larger and more established private company, try to improve it financially and then sell it at a profit.

27:46Ben Felix:Venture capital invests in early stage, high growth companies with the expectation that a small percentage of those companies will be massively successful, well, many will lose money. So venture capital tends to have very, very skewed distributions because of the way that they invest. They'll have a few really, really big winners and a lot of their investments will be losers in many cases, total losses, but that isn't necessarily a bad thing. Venture capital can still perform well despite the skewness, even because of the skewness. The private equity industry's value proposition for investors, and in my view, really rests on two main pillars, diversification relative to public markets, which is an interesting question, whether there's actually diversification there, and market beating returns, which is an even more interesting question.

28:30Ben Felix:These are testable claims, sort of, but the data can be pretty noisy. I'm not going to go through all the research on this topic. We have in past episodes gone into more depth on what the research says about private equity. We've also had Ludo Falapuan, who has done a lot of the research on private equity. We've had a conversation with him. people want to dig into this stuff more, they can listen to those episodes. A big point here, and this is one of the points that can be quite contentious, is net of fee private equity returns can be largely replicated using public stocks selected to match the characteristics of private equity holdings.

29:05Ben Felix:That's a big point. Another important point is that when you adjust private equity returns for the fact that private company shares are not valued every day, there is a dramatic reduction in any diversification benefit that may have been observed with raw private equity, with a smooth private equity returns. So I mean, another way to say that is that they're a lot more volatile and a lot more correlated with public markets than the private equity returns appear sort of on paper. So that's that concept of volatility laundering or smoothing as a service. Just because you don't see the price change every day doesn't mean that the asset's value isn't fluctuating.

29:40Ben Felix:Private equity fund might look really stable on paper while its underlying economic risks are very similar to, or maybe even more extreme than public market equivalents. Another issue is there's massive dispersion in private equity fund returns, meaning there's a huge gap between the best and worst funds, which increases the penalty for choosing the wrong funds. I think that part, Ben, I was just saying is going back to the IV portfolio, that with these famous portfolio allocations that institutions gain so much attention for, they cannot be replicated. Because it's one thing to say, well, we invested in broad market US equities, you can do the same.

30:23It's another thing for an institution to say, we bought a thousand acres of timberland in the northeastern US, you should do the same. The dispersion is where everything breaks down here, right? It's just not a replicable investment strategy on the retail level.

30:41Ben Felix:Just on performance, I want to read a quote from a recent paper from Ludo Falapu, just so it's not me hand waving this away. This is coming from Ludo's research. He says, private equities reported outperformance over public markets largely disappears once consistent benchmarks and definitions are applied. The average PME, that's the public market equivalent, which is a way of measuring private equity performance. PME values remain near parity with appropriate public equity indexes. That is debated in the literature. There are other papers that find outperformance. Ludo says when you do it properly, there's no outperformance.

31:15Ben Felix:But I mean, just the fact that this point is contentious, I think it is interesting. And we'll come back to that later. Ben, you had something? Yeah. I just find that fascinating. It makes me think of investor behavior. Everybody is always trying to find the next best thing that's going to give them an edge over the market. And this is just another category of possible outperformance or the hope of possible outperformance. Another interesting point is that the pre-fee returns of private equity have been massive. It's the net of fee returns that have been in line with public markets. They tend to charge high fees and there are multiple layers of fees.

31:52Ben Felix:Ludo said that total fees can end up being around 6%, although Larry says fees come down a lot relative to the historical data, which is another interesting point that we'll come back to later. But the fee problem is not the only issue plaguing private equity right now. The current state of private equity, as we mentioned earlier, is that a lot of funds have been unable to sell their holdings, not to meet investor redemption requests necessarily, but just to turn over their holdings at a normal pace. And so the result has not been falling prices for these unsold companies, which is probably what we would see if they were publicly traded companies.

32:27Ben Felix:But instead, it's shown up in the rise of more creative ways to get cash back into the hands of investors. One prominent example of that is something called continuation funds. That's a fund that buys portfolio assets from an existing private equity fund, often managed by the same manager, to give the fund, the initial fund, liquidity. Now we have these continuation funds. An increasingly common investor in continuation funds are a relatively new structure called evergreen funds. These are semi-liquid vehicles that promise ease of use for investors. It behaves more like a mutual fund instead of a traditional private equity fund.

33:04Ben Felix:And it also gives fund managers flexible capital, which can be used to support continuation funds and make other private market investments. Evergreen funds have typically lower barriers to entry than a traditional private equity fund. And because they offer more liquidity, they're supposed to be more accessible to retail investors. Now, these things have become an important source of secondary market capital. So that's the continuation fund idea. So buying private equity holdings from existing private equity funds, they raise a major concern, which is that the fund manager often controls both sides of the deal.

33:37Ben Felix:If the evergreen fund is buying an asset from another private equity fund. So this makes the accuracy of the secondary market valuations kind of murky. And I think it creates conditions for adverse selection. I think a reason that investors can buy into these evergreen funds relatively easily is that the manager has investments in existing funds nearing maturity that they have not yet sold. So there's this kind of structural need for exit liquidity to pay off original investors in private equity funds. As we mentioned earlier, private equity funds typically want to exit their investments to an outside buyer after a few years.

34:11Ben Felix:But if they instead sell the assets to an evergreen fund that they also manage, it may indicate that they had struggled to find an external buyer, which I think suggests the assets might not be something that you want to buy. I think there's a real risk that you're buying a lemon that the broader market would not have touched at the price that you were buying it for through the evergreen fund structure or continuation fund structure. Now, that's not necessarily always the case. Maybe you're getting a great deal. Maybe you're buying into some company that's going to win big in the future. I don't know, but that's the problem.

34:43Ben Felix:You don't know. You're not buying at a market tested valuation. Then we add on top of that risk, the sort of valuation risk, that net of fees, the average private equity fund has performed in line with public market equivalents. And I would say that investors in these evergreen vehicles may be taking on significant complexity and valuation risk without being properly compensated for it. Another interesting thing that's been happening with the liquidity situation is that some investors have been selling their stakes in private equity funds at discounts. So you've invested in a private equity fund, but you need some cash.

35:19Ben Felix:The fund isn't liquid, but you can find someone to buy your stakes from you at a deep discount. The thing that has risen from this phenomenon is something that's been called nav squeezing. This stuff gets pretty crazy. An example that I read about is with Harvard and Yale. As we mentioned, they've got pretty significant private equity holdings. Yale was one of the early adopters. Now, normally, these guys would wait many years for their private equity funds to exit companies and distribute the cash back to them as the investor, which is kind of the normal course for those investments. Historically, that has worked out, but recently, universities have needed cash and been forced to sell their private equity fund stakes sooner than planned to free up cash to fund their operations.

36:03Ben Felix:So Harvard and Yale have been selling parts of their private equity portfolios to secondary buyers at discounts. And those discounts have averaged around 11%. So this discount is a markdown from the position's net asset value. So the fund manager says, this is the net asset value. This is what we think, or what our maybe external evaluator thinks that the assets are worth, net asset value, which is an important concept. Now the trick here, as I said, this gets crazy. The secondary market buyers can put the purchase price on their own books. So they say, yeah, we bought this at a discount, but they can immediately market back up to its net asset value in calculating their own net asset value.

36:44Ben Felix:So if Harvard sells a hundred million dollar fund stake at an 11 % discount, the secondary market buyer of that fund stake can purchase it for $89 million, but then immediately market back up on their books to a hundred million dollars, because that was the funds nav that they just purchased, despite the fact that they paid $89 million for it. This is all kosher with the accounting rules, as I understand it. On paper, this purchase for the secondary market buyer of the fund stakes generated an immediate 12.3 % return. That's$11 million on$89 million, even though nothing about the underlying value of the companies has changed.

37:20It's pretty crazy. That's a pretty convenient way to juice your returns, isn't it? Yes. Buy something at a discount and claim it's worth whatever you think it's worth. That's hard to believe that that is all above board. Presumably it is. I'm not accusing anybody of anything except that that's bizarre.

37:39Ben Felix:As I understand it, it's all totally above board with the way the accounting rules work. Now, there have been a lot of secondary market sales. There were$162 billion of secondary market sales last year. For the universities, for Harvard and Yale in this case, they were able to free up capital. They got liquidity, which is great. The market mechanism worked for them. Whether the people in the funds that bought the assets are actually getting a good deal. I mean, on paper they are, but a little sketchy, I think. Now, where this gets even crazier is that some fund managers have adapted their fee structures to accommodate this setup.

38:15Ben Felix:Hamilton Lane, there's an article, I think in the Wall Street Journal about this. They updated their fee structure to collect performance fees based on unrealized gains, rather than the more typical practice of waiting until underlying holdings are actually sold to calculate their performance fees. They took in apparently$58 million in incentive fees shortly after changing the fee structure, which they may not have otherwise seen for many years under the old rules. I do think this smells a little fishy. Some people speculate, and this is mentioned in that article, that this change was made by Hamilton Lane because they themselves may suspect that the high paper valuations are not going to last.

38:53Ben Felix:They're collecting performance fees on that increase from a previous example, 89 million to 100 million. Like, oh, look at the gain. We'll collect some performance fees. Wow. Now bring this to retail, right? When retail investors are sold on the idea that these private equity funds are generating these large returns and that retail investors are buying into that, I think that's problematic. The paper returns might be a lot higher than what you can actually realize by selling the investment. Another current concern is the industry's heavy exposure to software companies. Private equity has gone pretty heavily into software and there are lots of concerns right now.

39:29Ben Felix:Software has been hit in general. People are worried about AI affecting software, whether that's a real concern or not remains to be seen. That's just another potential issue there. This is also affecting, so that the issues in private equity are also affecting private credit. Private credit has been one of the big funders of the leveraged buyouts that are happening in private equity. So in private equity, you go and borrow a bunch of money to buy a company who's lending it to them. It's private credit. So private credit consists of loans to private companies, kind of like a bond, except the loans are not publicly traded and they're created by non-bank entities like private credit funds or business development companies or BDCs for short.

40:09Ben Felix:So these funds raise money from investors and then make direct loans, often with flexible terms and covenants to private companies. The loans by their nature are risky. They're loans to private companies. And like private equity, private credit funds don't have their assets marked to market daily. So this again, allows them to appear low risk, even if the value of their underlying assets would be fluctuating pretty wildly in public markets. And again, like private equity, when the returns on private credit funds are properly evaluated against risk appropriate benchmarks, I don't think there's anything special there, which is again, that can be debated.

40:44Ben Felix:One important point is that similar to publicly traded high yield bonds, private loans often share return characteristics with riskier stocks. They kind of look like a mix of stocks and bonds if you do like a factor decomposition of their returns. Now, this asset class has seen enormous growth, but it's recently started to see investors wanting their money back. And due to the illiquidity in the underlying loans, some private credit funds have had to gate redemptions. So again, put yourself in the shoes of the investor. You put your money in a private credit fund to try and get some nice juicy yield.

41:17Ben Felix:Maybe you start to feel a little bit uneasy about the underlying assets. You ask for your money back. But the problem is, and you mentioned this earlier, Ben, people usually start to feel uneasy at around the same time. So when everyone wants their money back, the private credit fund says no. Now, again, I mentioned this earlier, that is a feature, not a bug, at least if you're the fund. Private loans are long-term loans. They're not expected to be liquid. They're not designed to be liquid. Investors in these funds should understand that going in, but that's a lot easier said than done, especially when we're talking about retail investors, as you mentioned earlier, Dan.

41:51Ben Felix:In some cases, gated funds can be locked up for years. You also mentioned that earlier, Ben. It can be painful. Publicly listed business development companies are pretty interesting contrast. Rather than gating, they feel the full force of the market's assessment of the value of their underlying loans. They are publicly traded. It's like a private credit fund that's publicly traded, basically, is what a BDC is. The FSKKR Capital Corporation is one interesting recent example. It reported an increase in troubled loans and lower investment income from its loan portfolio, and the market responded swiftly.

42:26Ben Felix:The fund is down significantly for the 12 months ending February 20, 27th. Another one was the Midcap Financial Investment Corporation. Similarly, marked down some of its loans and was recognized by the market for their honesty and their markdowns, got smacked pretty hard by public market pricing. I really think that the publicly traded BDCs indicates how much risk private credit funds are taking. I mean, these things are taking serious hits to their market prices while private credit funds are like, no, no, no, no, it's cool. Nav's good, but it probably isn't, especially when you consider that a lot of the funds are being gated.

43:07Ben Felix:This is just a fundamental truth. When you have risky underlying assets, you're either going to get volatility, or if you don't want to see the volatility, you're going to get illiquidity. I mentioned this earlier, but one of the problems with illiquidity is that you have to own assets that you know kind of stink and you have to continue paying fees to own them. To your point earlier, Ben, you don't know if you're actually going to get your money back. You don't know how much value you're going to realize on the aided portfolio. Here's another one. So we talked about nav squeezing for private equity.

43:34Ben Felix:This is another crazy thing that's been happening. Life insurance companies traditionally keep their large cash reserves in stable conservative investments. Private equity firms have been buying insurance companies and then moving significant amounts of the insurance company portfolio into private credit managed by the same private capital manager. This is just basic stuff like insurance companies taking insurance premiums. They actually have to be able to pay out benefits when someone dies or gets disabled or whatever type of insurance it is. In the interim, the cash can be invested. The cash they have sitting on hand can be invested and the insurance company does get to keep the difference between what they earn the investments and what they pay out to policyholders.

44:15Ben Felix:This recent playbook has emerged where private equity is buying the insurance company, stuffing its portfolio with private credit funds from lenders owned by the same private equity company that owns the insurer. Are insurance companies not highly regulated in what they can invest in to avoid this kind of thing? I would have to look into the details on regulation, but there have been a bunch of articles about this happening. So, I mean, it must be above board for it to be public knowledge that it's happening. I think it is creating this sort of closed loop of risk that could be really bad if the risk materializes in private credit.

44:47I don't know the rules either, but if it's happening because private companies are buying it, maybe that's a loophole too. Once you own the insurance company, then you can offer your own products inside of the insurance fund itself. We'd have to dig deeper on that.

45:02Ben Felix:Yeah. I'm not super up to speed on the insurance regulations. This is mostly US-based too. This has been happening all over the place. Now, these risks that we're talking about with private equity and private credit. I mentioned the publicly listed BDCs, but it's also showing up in the equity values of publicly listed players in this space. So managers of private equity and private credit or just private funds in general, their share prices have gotten just obliterated in recent history. So the market is really recognizing that, hey, there are real potential concerns happening here. Real quick, I want to mention private real estate.

45:39Ben Felix:So private real estate funds, they directly own real estate assets like apartment buildings, office towers, and shopping malls. As we talked about earlier, it's a pretty simple narrative. They can have various strategies, but the general idea of owning real buildings inside of a private fund is consistent across this asset class. They're often not unlike publicly traded REITs, except that the private funds don't trade on the stock market. Like private equity and credit, some of these private real estate funds in Canada for sure have not checked out the US, but in Canada, they have recently struggled with liquidity.

46:11Ben Felix:I don't think that's too surprising right now. Canadian real estate has experienced its worst real price decline going back to 1975 in recent history. Public residential real estate REITs have taken a beating and private fund managers, understandably, don't want to be forced to sell assets that have declined in price. Now, again, that's fine and that's why their contracts with their investors allow them to gate their funds in the midst of the liquidity crunch for many Canadian private real estate funds. Some are considering going public, which is interesting. Being public means that investors can buy and sell their shares on the open market without the fund needing to sell its underlying assets, but it also exposes the value of the fund's units to market prices.

46:54Ben Felix:In the case of this Canadian fund, they have halted redemptions for current investors while they consider going public. I don't know what will happen with this IPO or if they even will choose that direction, unless they're just considering it. But there are a couple of interesting examples from the US where this did happen. So in November of last year, FS Specialty Lending Fund listed on the New York Stock Exchange at a net asset value of$18.67 per share. On the end of its first day on the market, it closed at$14. And then in December, Blue Rock's Total Income Plus Real estate fund began trading on the New York Stock Exchange with a stated nav of$24.36 a share.

47:34Ben Felix:And at close, the fund was trading at a market price of$14.70 a share. It's a bad day. That's a 40%. 40 % drawdown. That's a very bad day. Is an IPO the right way to exit a private fund? I mean, like I said earlier, you're going to get illiquidity or you're going to get volatility. And if you don't want the illiquidity, it's going to show up as volatility as we saw with those two examples. Another, kind of like what we talked about with private equity, another fundamental question is whether private real estate funds are adding anything special that can't be found in a public rate. And I would summarize just real quick on that.

48:09Ben Felix:There's not a ton of evidence that private real estate has outperformed public. They're really exposed to the same underlying economic factors. There's not really anything special there. We did hear from Mamdu Medhat from Dimensional who had done a study on private asset funds that there may be some diversification potential left over, some meaningful diversification potential left over even after this return smoothing is accounted for. Maybe there are some arguments there, but the idea that you're going to get much higher returns or much less risk in private real estate, I don't think, similar to the other asset class we talked about, I don't think there's a whole lot of meat there.

48:44Ben Felix:Anyway, I think private markets have been sold to investors as a way to increase their expected returns without increasing and maybe even decreasing the amount of risk they're taking relative to public markets. Recent red flags in private equity credit and real estate have shown that these assets are at least as risky as their public counterparts and may be hiding additional layers of risk due to high fees, illiquidity, and less scrutiny in how assets are valued. I know I can say that I'm very glad that PWL did not jump headfirst into the space when it started getting pushed really hard through the wealth management channel and toward retail investors.

49:16Ben Felix:and I hope retail investors will approach these assets carefully as they continue to be promoted. Of course, as always, if you want to know more about PWL's super boring investing philosophy, which is awesome, awesomely boring, you can get in touch with us and talk to one of our advisors. Our super boring advisors. Super boring. Super boring, like Dan. Nodding off just thinking about it. Okay. So that was the main topic. I do want to just real quick go through Larry Swedger's comments. So Larry's been a big proponent of private assets. He holds a big portion of his own investments in private assets.

49:56Ben Felix:And it's his view that investors should be investing in private assets. So if someone asked him to comment on my video and he shared his comments in the Rational Miter community, so I'm going to read Larry's comments and offer my thoughts, which I also posted in the Rational Miter community. I do want to preface this by saying that Larry is a legend. He taught me a lot of what I know about financial markets and investing. I think that's probably true for all of us. Nothing but respect for him, even if we don't necessarily agree at the moment on this topic. And maybe we will end up agreeing. Maybe Larry will change my mind.

50:26Ben Felix:We'll see. So Larry says, Ben's a very smart guy, which I appreciate. And much of what he says in the video is correct. In fact, five to 10 years ago or so, I would have said the same things. But when things change, smart people re-evaluate their decisions, not stubbornly sticking to prior decisions based on old facts. Okay. My response there is on the new facts that private equity may have outperformed. I think there's a lot of issues around whether private equity has in fact outperformed. Everything really hinges on that point. So Larry references a recent paper from some of the folks at MSCI who have a huge private markets data business.

50:58Ben Felix:And that paper shows that private equity has outperformed, but a paper in the same journal from past Rational Reminder guest Ludo Fallop, who explains that, read this quote earlier, private equities reported outperformance over public markets largely disappears once consistent benchmarks and definitions are applied. Average PME values remain near parity with appropriate public equity indexes. I think at best, the fact, and I put that in air quotes in my notes, that PE has outperformed is contentious. And there's similar research coming out on private credit, suggesting that it performs in line with comparable publicly traded assets.

51:32Ben Felix:I think the fact that this is a debate at all is to me a huge problem. Eugene Fama referred to this same issue when he was on Rational Reminder years ago. We asked why not include private equity in portfolios since it's part of the market. Fama said, what is the expected return on private equity? The data don't give you a good answer to that because they're so self-selected. You only get to see the ones that survived pretty much. So you don't get to see how much money was put in there that blew up and was totally lost. and that's very important, very important. If I were on your side of the table and I had to advise investors what to do, I don't know what I would do about private equity because I don't think the data are good enough for me to give you an answer.

52:10Ben Felix:So just that alone, just the fact that this is a debate to me is problematic. Larry's next criticism, Ben, unfortunately missed two very important points. There is a significant illiquidity premium in return for the illiquidity potential. My response is that this statement really depends critically on the evaluation of private equity outperformance or lack thereof, any private asset class. If we can look and say, yep, it's outperformed, then hey, maybe that's evidence of an illiquidity premium. If we don't believe it's outperformed, then maybe there isn't. Again, I don't think this is super obvious.

52:42Ben Felix:Auntie Elmanin, when he was on Rational Reminder, explained that people are willing to pay for illiquidity because it provides smoothing as a service. It makes returns look more smooth than they really are, which may diminish or even negate entirely any illiquidity premium. Larry says, Ben's statement about returns and risk relative to public markets was true. And Larry says that he did write that in his books and articles. But what Ben sadly failed to mention is that fees have come way down, allowing investors to capture more of the premium. My response is that this really seems to ignore the economics of manager skill, which was thinking pioneered by Burke and Green in the 2004, I believe, paper.

53:22Ben Felix:We had Jonathan Burke as a past guest who talked about his research on this topic. Lowering fees in a competitive market increases the amount of assets that a skilled manager can handle, but it doesn't create automatic alpha for end investors. The economics of manager skill is basically that manager's funds will grow large enough to the point where the benefits of the skill are fully absorbed by the manager and investors earn returns in line with the amount of risk they're taking. But the only way to get outperformance is to identify a skilled manager that the market has not yet identified as skilled.

53:56Ben Felix:So lowering fees just increases the capacity of a manager, but doesn't necessarily result in alpha for investors. And with the massive influx of capital into private markets, it seems sensible to believe that alpha opportunities are increasingly scarce. Larry says private assets can be more tax efficient, like real estate, where most of the returns are return of capital, not ordinary income, like 90 % plus. That's a reasonable point on not something that I've honestly spent a whole lot of time digging into because we're not using private funds. Ben also failed to mention that unlike in public markets, there's strong evidence of persistence in private markets and for good logical reasons on which papers have been written.

54:35Ben Felix:and Larry did list some of those reasons. So if you can gain access to top quartile funds, you greatly improve your odds, which changes the math and the findings of academic papers, which look at averages greatly. This is a tough one. I don't think the evidence here is so strong to support an argument that you should be in private markets. The strongest evidence of persistence, as I understand it, is in venture capital, where adverse selection is also very strong. The best VC funds won't give you the allocation you want. They just won't. And we've been through this with clients trying to get access to the best VC funds, even with the best connections and so on and so forth, you will not get the allocation that you want.

55:11Ben Felix:If you can get an allocation at all, sometimes they just won't answer your calls for the best, like the top VC funds. Persistence in buyouts is in the worst performers. So the bottom quartile buyout funds tend to continue to be bottom quartile. So you can avoid them, but you can't look at past winners and assume that they are going to continue winning in, in buyouts. There was also a recent paper in Journal of Private Market Investing that suggested that even if there is some persistence in private equity funds, it's not typically investable persistence based on information that's available at the time of making investment decisions.

55:44Ben Felix:This is pretty interesting. Basically, you need to wait until a fund has realized its investments, like sold the underlying holdings and shut her down, fully matured in order to observe the performance that may predict future performance. But managers are typically raising their next fund before their previous fund has fully distributed. Anyway, persistence could be a good argument to be in private markets, but I just don't know if the data are that convincing. Similar to the outperformance concept more generally. Larry says, Ben failed to mention that private assets are actually less volatile in valuations due to the fact they're not influenced by investor sentiment and panic selling where you have massive market impact costs in panics, but the underlying businesses have not been impacted.

56:26Ben Felix:I struggle with this one. Investor sentiment is still there in private funds. It shows up in funds gaining redemptions rather than mark-to-market volatility. I think that's what we're seeing happening right now. Larry says, tell Ben to invite me on the podcast so we can shed more light on the topic. I'm totally down to do that, but I do want to spend a bit more time exploring the topic first. All right, that is it. Any parting thoughts? I find that just the discussion is interesting and it's good to have these healthy debates to explore both sides so that investors can make an informed decision one way or another.

56:59Ben Felix:We'll keep exploring the topic. There are some other interesting guests that I'm interested in talking to and totally open to having Larry on at some point, but I do want to do a bit of my own exploring first. I kind of already know what Larry's going to say, and I'm totally happy to hear it, but I want to explore more perspectives first.

57:20Ben Felix:Okay, real quick, we have a couple of reviews. Got to read the disclaimer here. We have a few reviews from Apple Podcasts to read. Under SEC regulations, we are required to disclose whether a review, which may be interpreted as a testimonial, was left by a client, whether any direct or indirect compensation was paid for the review, or whether there are any conflicts of interest related to the review. As reviews are generally anonymous, we are unable to identify if the reviewer is a client or disclose any such conflicts of interest. But as we always say, we have never paid for a review and we wouldn't do that because it'd be weird.

57:52Ben Felix:Does one of you guys want to read the first one? Sure, I'll take the first one. The best. This pod balances technical analysis and behavioral finance perfectly. Enjoying going back to the beginning and listening from the start now. Thank you, Ben, Cameron, and team by ChrisK519 from Canada. It's always impressive to me when people go back to the beginning. I hear that happen often. I've heard of a few people recently like, oh, I just found out this podcast and I've gone back to the beginning to listen to everything. And I've gotten through 200 episodes so far this year. That's crazy. And it gets increasingly crazy as the podcast gets longer in its existence.

58:29Ben Felix:Do you want to read the next one, Dan? Yeah, this one's really brief. It just references our interview with Tom Harden. And it's a short review. It says Riveting by Drew Burgasser from the US of A. So that was a very fun interview to do. Really interesting guy. I think a little bit of a departure from what we often do on the podcast, but my understanding is the feedback has been really positive. Yeah. People really liked that episode. It's one that maybe we could have done a better job with the title. I don't know, but it didn't like blow up. That episode should have blown up. Like that's such a good episode.

59:01Ben Felix:if people are listening to this and did not listen to the episode with tom harden i highly recommend going and listening to it it is as you mentioned dan a little bit of a departure from our typical type of content but i think it was just fascinating some unique and interesting perspectives all right good to see you guys and thanks everyone for listening see you next time thanks a lot see ya

59:26hey everyone it's producer matt thank you so much for tuning in to this week's episode. Before we sign off, here's the disclaimer you've been waiting for. Portfolio management and brokerage services in Canada are offered exclusively by PWL Capital, which is regulated by the Canadian Investment Regulatory Organization and is a member of the Canadian Investor Protection Fund. Investment advisory services in the United States of America are offered exclusively by One Digital Investment Advisors, LLC. One Digital and PWL Capital are affiliated entities, and they mostly get on really well with each other.

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1:00:34Furthermore, nothing herein should be construed as investment, tax, or legal advice. Even though we call the podcast your weekly reality check on sensible investing and financial decision making, you shouldn't rely on us when making actual decisions, only hypothetical ones. Different types of investments and investment strategies have varying degrees of risk and are not suitable for all investors. You should consult with a professional advisor to see how the information contained herein may apply to your individual circumstances. It might not apply at all. Honestly, you can probably ignore most of it.

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